DBRS Finalizes Provisional Ratings on FREMF 2018-K75 Mortgage Trust, Series 2018-K75

DBRS, Inc. (DBRS) finalized its provisional ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2018-K75 issued by FREMF 2018-K75 Mortgage Trust, Series 2018-K75:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X1 at AAA (sf)
-- Class X2-A at AAA (sf)
-- Class XAM at AA (low) (sf)
-- Class A-M at A (high) (sf)
-- Class B at BBB (high) (sf)
-- Class X2-B at BBB (sf)
-- Class C at BBB (low) (sf)

The trends are Stable.

Classes X2-A, X2-B, B, C and D have been privately placed.

Classes A-1, A-2, X1, XAM, A-M and X3 are being conveyed by Freddie Mac into the Freddie Mac Structured Pass-Through Certificates, Series K-075 Trust.

The X-1, X-AM, X2-A, X2-B and X-3 balances are notional. DBRS’s ratings on interest-only (IO) certificates address the likelihood of receiving interest based on the notional amount outstanding.

The collateral consists of 74 fixed-rate loans (two loans are cross-collateralized and cross-defaulted) secured by 74 multifamily properties. Most loans within the transaction are structured with ten-year loan terms, except for 40 Malvern Street, which is structured with a 10.5-year term and The Strand of Alexandria, which is structured with a 121-month term as a result of the seller contributing an initial interest deposit amount to the issuing entity that essentially covers one month of interest. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of default (POD) within the term as well as its liquidity at maturity. When the cut-off loan balances were measured against the DBRS Stabilized Net Cash Flow (NCF) and their respective actual constants, DBRS identified ten loans, representing 25.2% of the total pool, with a term debt service coverage ratio (DSCR) at or below 1.15 times (x) based on the whole-loan amount, which is indicative of a higher likelihood of term default. In addition, given the current low interest rate environment, DBRS also applied its refinance constants to the balloon amounts, resulting in 93.7% of the pool having refinance DSCRs below 1.00x, based on the whole loan.

The 74 loans benefit from strong origination practices. Loans on Freddie Mac’s balance sheet, which are originated according to the same policies as those for securitization, have an extremely low delinquency rate of 0.02% as of December 31, 2017, which compares favorably with the delinquency rate for commercial mortgage-backed security (CMBS) 2.0 multifamily loans of approximately 1.21% as of April 2017. The loans in the transaction generally benefit from experienced and financially strong borrowers compared with typical CMBS multifamily loans. Many of the borrowers are repeat clients of Freddie Mac. Underwriting is prudent, as evidenced by an average DBRS NCF variance of -7.0% on the sampled loans, although this variance is slightly higher than in rated transactions from prior years (typically 4.0% to 5.0%). In general, revenue has been set at levels similar to the recent trailing 12 months ending amount and lower than a recent annualized rent roll. Property locations are generally in more favorable markets, with 74.1% of the pool located in suburban locations and 10.6% of the pool located in either urban or super-dense urban locations. Relative to properties located in tertiary or rural markets, those in urban or suburban locations benefit from increased investor demand and liquidity even in times of stress. Texas, California and Florida represent the three largest state concentrations in the pool, or 47.3%, in aggregate.

The pool is concentrated by property type, as multifamily properties represent 100.0% of the collateral. Fifteen loans (11.9% of the pool) are secured by non-traditional property types (i.e., mobile home communities, student housing, co-operatives, age-restricted housing and assisted living). However, multifamily properties benefit from staggered lease rollover and generally low expense ratios compared with other property types. While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to respond when the market improves. Analysis performed on the 33 sampled loans indicates that most markets are displaying strong vacancy and rent growth figures, with positive year-over-year trends being established. Excluding co-operatives, many of the non-traditional multifamily uses have been modeled with an increase to the loan’s POD. Fifty-two loans, representing 70.2% of the pool, have an IO period between two years and eight years before amortization commences. Furthermore, an additional 14 loans, five of which are in the top 15, representing 26.7% of the pool, are IO for the entire ten-year loan term. The full-term IO loans have an average DBRS Exit Debt Yield of 7.9%, which is slightly below, but consistent with, the overall deal averages. Five of the properties, representing 98.9% of the full-term IO concentration, are well located in urban or established suburban locations with only one property located in a tertiary market. Furthermore, all of the full-term IO loans have appraised loan-to-value (LTV) ratios at or below 70.0% compared with the deal weighted-average LTV ratio of 67.7%. In aggregate, the pool is scheduled to realize 7.9% amortization by maturity.

The DBRS sample included 33 loans and site inspections were performed on 31 of the 74 properties in the pool (66.7% of the pool by allocated loan balance). DBRS conducted meetings with the on-site property manager, leasing agent or a representative of the borrowing entity for 57.5% of the pool. A cash flow review as well as a cash flow stability and structural review were completed on 33 of the 71 loans, representing 69.4% of the pool by loan balance. The DBRS sample had an average NCF variance of -7.0%. The DBRS sample NCF variance ranged from -16.5% (The Apex at 290) to +2.4% (Lewisville Estates).

Classes X1, XAM, X2-A and X2-B are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated reference tranche adjusted upward by one notch if senior in the waterfall.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

For more information on this transaction and supporting data, please log into www.viewpoint.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint platform.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are North American CMBS Multi-borrower Rating Methodology, Rating North American CMBS Interest-Only Certificates and DBRS Commercial Real Estate Property Analysis Criteria, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form 15-E) which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not rely on the due diligence services outlined in Form 15-E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.